Over the past decade or more the Sri Lankan economy has become less and less open to the world than it has ever been. Exports to GDP has nearly halved; the share of trade in overall growth has fallen, our overall tariff protection rates are higher now than in the past; our export diversification and product complexity now is far behind countries that were at the same level as we were several decades ago; and our foreign policy has not focused enough on economic relations and trade agreements. Looking at Sri Lanka’s export product categories, not much has changed between 1990 and 2013, whereas in countries like Thailand there are dramatic shifts from basic exports to highly sophisticated exports.
Reforms to Open Up
We must change the orientation of the Sri Lankan economy, if the country is to succeed at achieving sustained high growth and boost prosperity for our people. When you measure along trade openness (exports + imports as % of GDP) and along public vs. private sector participation – the Sri Lankan economy in 2013/2014 looks more like 1970, according to analysis in a forthcoming World Bank publication.
But the positive news is that when Sri Lanka did undertake liberalization policies in the past, the economy saw positive results. In the years following waves of reforms – both in the early 1980s (after 1977) but most clearly in the late 1990s and early 2000s (after the 2nd wave of reforms in 1990) the economy was more export oriented and more private sector driven. In the last couple of decades, in the absence of critical next generation reforms, we have slid back.
The Sri Lankan economy has a lot going for it – an unviable strategic location, rich biodiversity, a strong human resource base due to past investments, in the midst of the Asian century, and in close proximity to major markets like India. But the reality is that we are not the only ‘hot stuff’ on the market. We are in a dynamic region, but around us we have a lot of dynamic countries doing a lot of progressive things that make them attractive locations for international business. Sometimes I wonder – have we tricked ourselves into thinking that Sri Lanka is such a magical country where investors ought to come to, where foreign companies ought to do business with us?
Sri Lanka must reposition itself on the global stage and provide the right climate for companies to thrive on that stage. Two aspects are important for Sri Lankan companies to gain from this – a level playing field here at home and opening up of the playing field overseas.
A Better Playing Field at Home
Creating a level playing field at home means removing unnecessary and harmful distortions that have crept in over the past decade and incentives that really haven’t worked. Protectionism for selected industries and producst – often benefitting one or two recognisable firms with political patronage – have created disincentives for competition and dynamism. There has been a noticeable bias towards domestic economic activities and domestic non-tradables than export orientation in the past decade. While this would be fine for a large economy with a large domestic market, for Sri Lanka such a strategy is not sustainable.
Meanwhile, we must look strategically at leveraging on the massive new infrastructure outlays of the past decade – some of which have been doubted for their usefulness but can boost growth if managed cleverly. For instance how can we make Hambantota work and not abandon it due to political compulsions? Already it is emerging as a key vehicle transshipment port in the region. But beyond this, a private-public partnershuip approach is necessary to operationalise the port-airport-industrial zone nexus and make it an export hub like what Malaysia did in Penang.
Opening Up The Playing Field Abroad
Opening up the playing field abroad is a must to help Sri Lankan firms gain a greater foothold in the international market. This is a key area the state can help. It is where our foreign policy and international economic policy comes in. In recent years, much of our foreign policy has been preoccupied with managing international relations related to the end of the war, human rights, and governance issues. We must reorient this. Future foreign visits must necessarily have a strong trade and investment component with a strategically planned international business agenda. Diplomatic delegations must take with them foreign investors who have set up here and are thriving – let them tell the Sri Lanka story. That’s what the Penang Development Corporation in Malaysia did when they wanted to attract international business into the Penang Export Hub. When 3M first invested there, top executives from 3M were taken along with Malaysian political delegations to convince other foreign investors about the benefits of locating in Penang. Having global multinational executives selling your country for you is a powerful signal to potential new international investors.
Supporting Firms To Go Global
Much of Sri Lanka’s – and indeed many Asian countries – industrial policy approaches of the past have been focussed on trying to identify export sectors and providing a host of incentives and support to growth them. It worked in many East Asian coutnries only because of strong state capacity. Unfortunately, the Sri Lankan institutional set up to support exports and industry has not kept up with evolving needs. While traditional sectors like garments, tea, rubber, gems, etc., would continue as in the past, I would advocate that state institutions focus less and less on promoting full sectors. The future focus should be – “how can we help more Sri Lanka firms go global?”, rather than be obsessed with identifying and promoting sectors. This goes back to the argument on the states’ role in providing a level playing field at home and expanding the playing field overseas. There are a lot of very competent and competitive Sri Lankan firms who have proven that Sri Lanka can win in lucrative niches that may not be part of full sectors. Sri Lanka can boast of a manufacturing company that produces the impact sensors for airbags and seatbelts for much of the Japan’s automobiles; a technology company that produces combat simulation software for the US military; and a medium-sized fly fish producer that supplies the leading US brand of sport fishing equipment. These are all individuals companies winning in the export game. We need to help more of them emerge and win new markets. We may have to end our preoccupation with trying to promote whole sectors, and state institutions like the EDB and Ministry of Industries would have to reorient to support this new agenda.
This is the 19th article in the ‘Smart Future’ column that advances ideas on competitiveness, innovation, and economic reforms.